Reed was steered into hedge funds largely under the guidance of hedge fund pioneer Walter Mintz ’50.
It was a combination of donor generosity, and Mintz’s industry connections and careful portfolio
selections, that helped boost the college’s endowment from tens of millions in the mid-1980s
(when he led the board’s investment committee), to around $300 million by the end of the century.
Mintz never went in for big names and risky bets, and that has influenced his successors as they
reposition the college’s investments. His investment philosophy is described by Reedies who
have pursued careers in high finance as a formidable mix of intellectual rigor and simple common
sense.

Mintz, who died in 2004, co-founded the multibillion-dollar investment firm Cumberland Associates.
His understanding of what well run equity-based funds could accomplish helped establish the college
as a leader among educational endowments using hedge funds.

“We knew about traditional money managers, and they were buying New York Stock Exchange-listed
equities,” says college treasurer Ed McFarlane, who arrived at Reed in the early 1970s as the
college struggled to make ends meet. Though Reed’s financial fortunes had stabilized a bit
by the time Mintz started playing an active role, the endowment still had to hit steep growth targets
to keep up with the aspirations of the college. Hedge funds offered a consistent double-digit lift
year-in and year-out.

“We knew we needed to be much more aggressive in our approach to the endowment,” McFarlane
says. “We were convinced that in the long term, hedge funds were the way to grow it. We felt
that no other investment style had performed like that historically.”

The basic model of the hedge fund was originally devised in 1949 by Barron’s writer
Alfred Winslow Jones. These privately managed funds literally “hedged” their bets by
taking positions that would reduce the risk of a large loss if stocks swung precipitously up or down.

Today, many hedge fund managers still pursue this strategy by owning some stocks outright, in “long” positions
that will make money if they rise in value, while betting against other stocks by “going short,” borrowing
securities from a brokerage and hoping they will decline in price. By buying the stock back at a
lower price—after paying margin interest on the borrowed stock—investors are insulated
from market movement in one direction or the other.

Hedge funds are most commonly structured as private investment partnerships, setting them apart
from the much larger ($9 trillion) mutual fund industry, which takes investments from the general
public and is more open to public scrutiny. Hedge fund managers can make a lot more money than the
folks running mutual funds; they collect an average of 20 percent of an investor’s profits
as an incentive fee, on top of an annual management fee, which is generally 2 percent of what an
investor places in a fund. This can lead to considerable wealth, but it can also encourage risky
bets if a fund strays from its basic goal of delivering returns that don’t depend on the general
direction of the financial markets.

Mutual funds also build in greater degrees of risk control than most hedge funds, a factor that
can limit mutual fund returns, but can also offer greater diversification. For instance, most equity
mutual funds can’t put more than a certain percentage of the fund into any one stock, and very
few use borrowed money, or leverage, to amplify their profits on a trade. Unlike hedge funds, however,
most mutual funds are long-only vehicles, meaning that they’re subject to basic equity market
volatility.